Making a Co-living Offer Financially Compelling | Co-Living Financially
For a co-living “to buy” option to work, it needs to be financially compelling from the perspective of buyers, developers and other stakeholders such as mortgage lenders.
As part of the survey research undertaken as part of this study, we asked individuals about the maximum price that they would be willing to pay for a studio flat in a co-living development, relative to the price of a conventional one bedroom flat in the same area. As graphed below, responses to the question varied among the under 40s, with a mean maximum price of about 60% of the value of a one bedroom flat.
To give an example of what this kind of financial proposition could mean for an individual’s ability to get on the property ladder, consider the case of an area in London where a typical one bedroom flat costs about £350,000. If a small studio apartment in a co-living space can be sold, viably, at 60% of this price, it would entail a sale value of £210,000. If the co- living product were eligible for purchase using Help to Buy, then the purchase could be made with a 5% deposit of £10,500, a 40% government equity loan of £84,000 and a mortgage of £115,500 on the remaining balance. Assuming a maximum mortgage to income multiple of 4.5, this could be a viable form of house purchase for those on a salary of about £26,000 and above, contingent on an individual having a sufficient deposit. In contrast, the one bedroom flat, also bought with Help to Buy and assuming a 40% equity loan, would only be accessible for those with an income of about £43,000 or more.
This is, of course, a stylistic worked example. Mortgage lending is contingent on other factors beyond income, such as an individual’s other spending commitments and how that impacts their ability to service a mortgage. However, what these calculations highlight is the role that affordable co-living units could play in making homeownership achievable for a wider group of individuals.
Continuing with our illustrative example, if the mortgage of £115,500 is taken out at an interest rate of 4% for a period of 25 years, this entails monthly payments of £610 – about 35% of the disposable income of an employee earning £26,0002.
In addition to mortgage costs, someone buying a studio in a co-living development would probably face service charges associated with the maintenance of shared spaces such as gyms, communal lounge areas and cinema rooms. Depending on the breadth and quality of communal services, such charges could be substantial – of a similar order of magnitude to mortgage costs or more. Even with a conventional leasehold flat without substantial communal facilities, the Association of Residential Managing agents estimates that service costs in London average between £1,800 and £2,000 per year. Service costs could escalate drastically once facilities such as swimming pools, gyms and cinemas are factored into a co-living space.
As such, realising the twin visions of increased housing affordability and desirable, high quality communal living requires a challenging balancing act. Enhancing the quality of communal facilities could compromise the extent to which co-living can provide homeownership to those on modest incomes. Including service charges, overall housing costs could end up proving unaffordable. And mortgage lenders would presumably consider such service charges, and an individual’s ability to pay them, when deciding whether or not to grant a mortgage.
Having said that, there is scope for diversity of co-living offers, with budget and premium developments offering different levels of communal facilities. Furthermore, there may be scope to share some of the costs associated with communal facilities with the wider public or with government; for example residents’ gyms could be made available for non- residents (for a cost) during certain times of day. Such moves could help reduce service charges associated with maintenance – providing a more affordable proposition.
Establishing the construction costs that a developer would face in creating a co-living space is difficult, given the range of communal facilities and sizes of private housing space that could be provided. At its most basic level – small studio apartments and basic communal facilities – the construction costs of a co-living space could be close to those associated with student accommodation. According to CBRE, the average build cost of an en-suite student bedroom ranged from £35,000 to £45,000 in 2014. Research by JLL on student accommodation in London in 2017 estimated a build cost of £80,000 to £90,000 excluding land costs.